Dollar breaches key resistance

The greenback was higher at the close of North American trade on Wednesday with the Dow Jones FXCM Dollar Index (Ticker: USDollar) advancing 0.46% on the session. Stocks spent the bulk of the day paring early losses after market sentiment drifted lower overnight on continued concerns over the European crisis with Italy’s largest bank requesting the ECB to broaden the types of assets considered as collateral and yields on Italian, Spanish, and French debt continuing to climb. In fact, the spread between German and French yields hit their highest level since February of 1990, suggesting contagion concerns are being heavily priced in here. The equity rally was quickly reversed however after rating agency Fitch warned that US exposure to euro zone contagion poses a threat to the US banking sector. The headlines prompted massive risk sell-off just minutes ahead of the close with the Dow, the S&P, and the NASDAQ closing sharply lower by 1.58%, 1.66%, and 1.73% respectively.

All week long we have continued to eye a close above the 9833 mark to further support our bullish bias on the dollar. Although the index did clear to the level today, daily relative strength continues to hold below RSI resistance at the 57-mark. A break here would provide further support for extended dollar rallies with initial targets held at 9900 and the 23.6% Fibonacci extension taken from the June 2010 and November 2010 crests at 9970. As noted in yesterday’s USD Trading report, the downside continues to be supported by the 38.2% Fibonacci extension at 9745 and the 50 & 100-day moving averages.

An hourly chart shows the index continuing to hold within the confines of an ascending channel dating back to October 31st with the greenback now testing topside resistance at the 50% Fibonacci extension taken from the 1st and October 27th troughs at 9850. A confirmed break above this level targets the convergence of upper-bound trendline resistance and the 9900 level. Interim support rests at 9800 backed by the 38.2% extension at 9754 and channel support.

The greenback advanced against all four component currencies as the late afternoon headlines saw traders jettison risk across asset classes in favor of the safety of the reserve currency. Highlighting today’s performance chart is a 0.94% advance against the aussie which came under substantial pressure on the news. The euro and the pound also relinquished gains made earlier in the session with the yen closing virtually flat on the day with a loss of just 0.01%. We continue to note that although the USD/JPY pair is likely to continue lower, losses are likely to be tempered as traders remain on intervention watch.

Thursday's economic docket is highlighted by housing data with October housing starts and building permits on tap. Housing starts are expected to decline rather sharply with a loss of 7.3% m/m, while permits are seen climbing by a modest 1.9% m/m. Developments out of Europe will continue to dictate market price action however as headline after headline continue to suggest that contagion has now become a reality as yields on government debt around the region continue to rise. Accordingly the dollar may continue to rise on the back of heightened risk aversion flows. It’s worth noting however that on the back of this threat of a US debt downgrade from Fitch, that should the Fed hint at further quantitative easing, the dollar could quickly relinquish its advance as the central bank looks to implement further dollar diluting policies.

Date

GMT

Importance

Release

Expected

Prior

11/17

13:30

MEDIUM

Housing Starts (MoM) (OCT)

-7.3%

15.0%

11/17

13:30

MEDIUM

Housing Starts (OCT)

610K

658K

11/17

13:30

MEDIUM

Building Permits (MoM) (OCT)

1.9%

-5.0%

11/17

13:30

MEDIUM

Building Permits (OCT)

600K

594K

11/17

13:30

LOW

Initial Jobless Claims (NOV 12)

395K

390K

11/17

13:30

LOW

Continuing Claims (NOV 5)

3608K

3615K

Michael Boutros, Currency Analyst for DailyFX.com is a Technical/Fundamental Analyst specializing in the FX markets. E-mail:mboutros@fxcm.com.